The first President of the Bank was Wim Duisenberg, the former president of the Dutch central bank and the European Monetary Institute. While Duisenberg had been the head of the EMI (taking over from Alexandre Lamfalussy of Belgium) just before the ECB came into existence, the French government wanted Jean-Claude Trichet, former head of the French central bank,
to be the ECB's first president. The French argued that since the ECB
was to be located in Germany, its President should be French. This was
opposed by the German, Dutch and Belgian governments who saw Duisenberg
as a guarantor of a strong euro.[4]
Tensions were abated by a gentleman's agreement in which Duisenberg
would stand down before the end of his mandate, to be replaced by
Trichet, an event which occurred in November 2003.

There had also been tension over the ECB's Executive Board, with the United Kingdom demanding a seat even though it had not joined the Single Currency.[4]
Under pressure from France, three seats were assigned to the largest
members, France, Germany, and Italy; Spain also demanded and obtained a
seat. Despite such a system of appointment the board asserted its
independence early on in resisting calls for interest rates and future
candidates to it.[4]

When the ECB was created, it covered a Eurozone
of eleven members. Since then, Greece joined in January 2001, Slovenia
in January 2007, Cyprus and Malta in January 2008, Slovakia in January
2009, and Estonia in January 2011, enlarging the bank's scope and the
membership of its Governing Council.[2]

On 1 December 2009, the Treaty of Lisbon entered into force, ECB
according to the article 13 of TEU, gained official status of an EU institution.

In April of 2011, the ECB raised interest rates for the first time since 2008 from 1% to 1.25% [5], with a further increase to 1.50% in July 2011 [6].

The primary objective of the ECB is to maintain price stability within the Eurozone, or in other words to keep inflation low. The Governing Council defined price stability as inflation (Harmonised Index of Consumer Prices) of below, but close to, 2%.[7]
Unlike for example the United States Federal Reserve Bank, the ECB has
only one primary objective with other objectives subordinate to it.

The key tasks of the ECB are to define and implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and promote smooth operation of the financial market infrastructure under the Target payments system[8] and being currently developed technical platform for settlement of securities in Europe (TARGET2 Securities). Furthermore, it has the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins
but the amount must be authorised by the ECB beforehand (upon the
introduction of the euro, the ECB also had exclusive right to issue
coins).[8]

In U.S. style central banking, liquidity is furnished to the economy primarily through the purchase of Treasury bonds by the Federal Reserve Bank. The Eurosystem uses a different method. Eligible banks, of which there are about 1500 may bid for short term repo contracts of two weeks' to three months' duration. [9]
The banks in effect borrow cash and must pay it back; the short
durations allow interest rates to be adjusted continually. When the repo
notes come due the participating banks bid again. An increase in the
quantity of notes offered at auction allows an increase in liquidity in
the economy. A decrease has the contrary effect. The contracts are
carried on the asset side of the European Central Bank's balance sheet
and the resulting deposits in member banks are carried as a liability.
In lay terms, the liability of the central bank is money, and an
increase in deposits in member banks, carried as a liability by the
central bank, means that more money has been put into the economy.[10]

To qualify for participation in the auctions, banks must be able to
offer proof of appropriate collateral in the form of loans to other
entities. These can be the public debt of member states, but a fairly
wide range of private banking securities are also accepted.[11] The fairly stringent membership requirements for the European Union, especially with regard to sovereign debt
as a percentage of each member state's gross domestic product, are
designed to insure that assets offered to the bank as collateral are, at
least in theory, all equally good, and all equally protected from the
risk of inflation. The economic and financial crisis that began in 2008
has revealed some relative weaknesses in the sovereign debt of such
member countries as Portugal, Ireland, Greece and Spain ('PIGS').[12]
It is interesting that all four countries are located geographically on
the periphery of the Eurozone. These securities are not limited to the
countries of issue, but held in many cases by banks in other member
states. To the extent that the banks authorized to borrow from the ECB
have compromised collateral, their ability to borrow from the ECB—and
thus the liquidity of the economic system—is impaired. This threat has
drawn the ECB into rescue operations. But weak sovereign debt is not the
only source of weakness in the ECB's operations, as the collapse of the
market in U.S. dollar denominated collateralized debt obligations has also led to large scale interventions in cooperation with the Federal Reserve.

Rescue operations involving sovereign debt have included temporarily
moving bad or weak assets off the balance sheets of the weak member
banks into the balance sheets of the European Central Bank. Such action
is viewed as monetization
and can be seen as an inflationary threat, whereby the strong member
countries of the ECB shoulder the burden of monetary expansion (and
potential inflation) in order to save the weak member countries. Most
central banks prefer to move weak assets off their balance sheets with
some kind of agreement as to how the debt will continue to be serviced.
This preference has typically led the ECB to argue that the weaker
member countries must (a) allocate considerable national income to
servicing debts and (b) scale back a wide range of national expenditures
(such as education, infrastructure, and welfare transfer payments) in order to make their payments.

The European Central Bank had stepped up the buying of member nations debt.[13]
In response to the crisis of 2010, some proposals have surfaced for a
collective European bond issue that would allow the central bank to
purchase a European version of U.S. Treasury Bills.[14][15]
To make European sovereign debt assets more similar to a U.S. Treasury,
a collective guarantee of the member states' solvency would be
necessary.[16]
But the German government has resisted this proposal, and other
analyses indicate that "the sickness of the Euro" is due to the linkage
between sovereign debt and failing national banking systems. If the
European central bank were to deal directly with failing banking systems
sovereign debt would not look as leveraged relative to national income
in the financially weaker member states.[15]

On 9 May 2010, the 27 member states[17] of the European Union agreed to incorporate the European Financial Stability Facility (EFSF) a special purpose vehicle (SPV) off balance sheet of European Central Bank (ECB) placing bonds to raise money to financing the Deficit spending
that European Governments used to replace a share of banking system
losses. Even if, it is not legal under the European Union laws, the EFSF
incorporation was mandatory because ECB cannot monetarize directly the
European States' deficit spending. The main share of banking system
losses (€ 3.5 trillions) are hidden into the main banks' balance sheets
(and into the ECB's balance sheet). This fact give seriuos problems to
liquidity of Interbank lending market involving trust that banks have each other and forcing ECB to use unconventional measures about Monetary policy.

On 17 December 2010, the ECB announced that it was going to double its capitalization.[18] (The ECB's most recent balance sheet before the announcement listed capital and reserves at €2.03 trillion.)[19]
The sixteen central banks of the member states would transfer assets to
the ledger of the ECB. In banking, assets (loans) are used to offset
liabilities (deposits and currency). If some of the sovereign debt held
as an asset by the ECB becomes non-performing, the asset is "bad" and
the deposits, in this case, currency, are not appropriately backed. This
inequality means that liabilities exceed assets and therefore the bank
is in trouble. One response is to use the bank's capital to offset the
losses. The use of capital to offset a loss transfers the loss to the
bank's shareholders: the member banks. The increased capitalization of
the ECB against potential sovereign debt default means that the sixteen
member banks are also exposed to potential losses. In 2011, the European
member states may need to raise as much as US$2 trillion in debt. Some
of this will be new debt and some will be previous debt that is "rolled
over" as older loans reach maturity. In either case, the ability to
raise this money depends on the confidence of investors in the European
financial system. The ability of the European Union to guarantee its
members' sovereign debt obligations have direct implications for the
core assets of the banking system that support the Euro.[18]
Although "unthinkable," a collapse of the euro (with a reversion to
individual national currencies) became, at the end of 2010, a topic of
speculation in the financial press.[20]

The bank must also co-operate within the EU and internationally with
third bodies and entities. Finally it contributes to maintaining a
stable financial system and monitoring the banking sector.[21] The latter can be seen, for example, in the bank's intervention during the 2007 credit crisis when it loaned billions of euros to banks to stabilise the financial system.[22] In December 2007, the ECB decided in conjunction with the Federal Reserve under a program called Term auction facility to improve dollar liquidity in the eurozone and to stabilise the money market.[23]

Although the ECB is governed by European law directly and thus not by
corporate law applying to private law companies, its set-up resembles
that of a corporation in the sense that the ECB has shareholders and
stock capital. Its capital is five billion euros[24]
which is held by the national central banks of the member states as
shareholders. The initial capital allocation key was determined in 1998
on the basis of the states' population and GDP,[25] but the key is adjustable.[26] Shares in the ECB are not transferable and cannot be used as collateral.[27]

All National Central Banks (NCBs) that own a share of the ECB capital
stock as of 1 January 2011 are listed below. Non-Euro area NCBs are
required to pay up only a very small percentage of their subscribed
capital, which accounts for the different magnitudes of Euro area and
Non-Euro area total paid-up capital.[28]

The Executive Board is responsible for the implementation of monetary
policy defined by the Governing Council and the day-to-day running of
the bank. In this it can issue decisions to national central banks and
may also exercise powers delegated to it by the Governing Council. It is
composed of the President of the Bank (currently Jean-Claude Trichet), a vice president and four other members. They are all appointed by common accord of the Eurozone member states for non-renewable terms of eight years.

The General Council is a body dealing with transitional issues of
euro adoption, for example fixing the exchange rates of currencies being
replaced by the euro (continuing the tasks of the former EMI). It will
continue to exist until all EU member states adopt the euro, at which
point it will be dissolved. It is composed of the President and Vice
President together with the governors of all of the EU's national central banks.[29][30]

Throughout 2011 various member states of the European Union showed
themselves to be increasingly unable to meet financial commitments. At
its heart, the crisis of the European currency unit or ECU is similar to
almost any other financial crisis, including the crisis of 2008. Key
concepts to understanding the crisis include collateral, assets, and liabilities.

The principal monetary policy tool of the European central bank is
collateralized borrowing or repo agreements. These tools are also used
by the United States Federal Reserve Bank, but the Fed does more direct
purchasing of financial assets than its European counterpart. The
collateral used by the ECB is typically high quality public and private
sector debt. The criteria for determining "high quality" for public debt
have been preconditions for membership in the European Union: total
debt must not be too large in relation to Gross Domestic Product, for
example, and deficits in any given year must not become too large.
Though these criteria are fairly simple, but a number of accounting
techniques may hide the underlying reality of fiscal solvency—or the
lack of same. Furthermore, in a depressed economic environment tax
revenues decline and alter the credit profile of states that have
already issued debt.

In central banking, the privileged status of the central bank is that it can make as much money as it deems needed. In the United States Federal Reserve Bank,
the Federal Reserve buys assets: typically, bonds issued by the Federal
government. There is no limit on the bonds that it can buy. In the
European Central Bank system, the central bank lends money on collateral
put up by the official members of the banking system. There is no limit
on the amount of collateral it can accept. Both operations have the
effect of putting money into the economy, most of it in the form of
electronic deposits. Additionally, the Federal Reserve can and does
engage in collateral operations, and the European Central Bank can and
does purchase assets outright rather than accept them as collateral.[31]

If bonds held by a central bank turn out to have lower value because
the issuer is unable to pay, a basic principle of banking finance is
violated: the liabilities of the bank (money used in the economy) are
not properly balanced by assets held by the central bank (bonds owned
outright, and also bonds held as collateral). In 2011 this is
essentially what happened. The value of the assets (the bonds sold) by
member states such as Greece, Portugal, Ireland, Spain, and eventually
even Italy began to be discounted by international traders who
questioned the ability of these states to meet their obligations under
depressed economic conditions. As the market began to put lesser value
on these assets, it diminished the value of assets held by the European
Central Bank and also assets held by the private banks that do business
with the European central bank.

There are a variety of possible responses to the problem of bad debts
in a banking system. One is to induce debtors to make a greater effort
to make good on their debts. With public debt this usually means getting
governments to maintain debt payments while cutting back on other forms
of expenditure. Such policies often involve cutting back on popular
social programs.[32]
Stringent policies with regard to social expenditures and employment in
the state sector have led to riots and political protests in Greece.[33]Another
response is to shift losses from the central bank to private investors
who are asked to "share the pain" of partial defaults that take the form
of rescheduling debt payments. However, if the debt rescheduling causes
losses on loans held by European banks, it weakens the private banking
system, which then puts pressure on the central bank to come to the aid
of those banks. Private sector bond holders are an integral part of the
public and private banking system. Another possible response is for
wealthy member countries to guarantee or purchase the debt of countries
that have defaulted or are likely to default. This alternative requires
that the tax revenues and credit of the wealthy member countries be used
to refinance the previous borrowing of the weaker member countries, and
is politically controversial.[34]
Indeed, reluctance in Germany to take on the burden of financing or
guaranteeing the debts of weaker countries has led to public reports
that some elites in Germany would prefer to see Greece, Portugal, and
even Italy leave the Euro zone "temporarily."[35]

The ECB can attempt to absorb losses by raising capital from its
members. The additional paid in capital is meant to offset the losses
due to the poor payment prospects of the weaker members. Increasing the
capitalization of the ECB by the wealthier states is another way of
getting the wealthier states to pay for losses on debts issued by the
poorer states, and therefore also controversial.

A central bank can ignore a balance sheet problem (either its own or
member banks of the system that it governs) simply by listing its bad
assets "at par value" (the original price) rather than acknowledging the
actual market price, or, what amounts to the same thing, delaying
enforcement.[36]
Such a practice does not go unremarked by the international community:
the reason that a government debt and banking crisis go together is in
part due to the fact that the world's leading countries and their
currencies are watched carefully for such balance sheet manipulations.
Keeping weak assets on the books is a path to weakening the European
currency against other international currencies. The reason that "doing
nothing" in response to the collapse of member state public sector debt
is not an option is that it would ultimately invite speculative attacks on the European currency and undermine its value.By
early September 2011 a number of major European banks were technically
insolvent: with significant Italian and Spanish bonds in their
portfolios, the market mark-down of the value of these instruments left
the banks with over-valued assets on their books. Banks in this
condition are informally referred to as "zombie banks.[citation needed]"[37][not in citation given]
Another sign of the crisis was that interbank lending was in retreat,
with European banks having decreasing confidence in the solvency of
other European banks.[37] A sharp decrease in inter-bank lending puts sharp constraints on the money supply and is a symptom of deepening crisis.

The ECB could, and through the late summer of 2011 did, purchase
bonds issued by the weaker states even though it assumes, in doing so,
the risk of a deteriorating balance sheet. ECB buying focused primarily
on Spanish and Italian debt.[38]
Certain techniques can minimize the impact. Purchases of Italian bonds
by the central bank, for example, were intended to dampen international
speculation and strengthen portfolios in the private sector and also the
central bank.[39]
The assumption is that speculative activity will decrease over time and
the value of the assets increase. Such a move is similar to what the
U.S. federal reserve did in buying subprime mortgages in the crisis of
2008, except in the European crisis, the purchases are of member state
debt. The risk of such a move is that it could diminish the value of the
currency. On the other hand, certain financial techniques can reduce
the impact of such purchases on the currency. One is sterilization,
wherein highly valued assets are sold at the same time that the weaker
assets are purchased, which keeps the money supply neutral. Another
technique is simply to accept the bad assets as long-term collateral (as
opposed to short-term repo swaps) to be held until their market value
stabilizes. This would imply, as a quid pro quo, adjustments in taxation
and expenditure in the economies of the weaker states to improve the
perceived value of the assets. In September 2011, Axel Weber and Jürgen Stark separately resigned before the ends of their terms from the Governing Council, both Germans thought to have been dissatisfied with the bank's bond-buying policy.[40]
The resignations were reported as due to their opposition to
potentially inflationary bond-buying programs conducted by the ECB.
Subsequent declines in world stock markets were due in part to
widespread concerns about the future of the Euro and the internal
governance of the ECB.

Central bank debt purchases that are made to stabilize economic systems without regard to real economic growth are called monetization.
Conventional theory argues that such increases in the money supply lead
almost automatically to domestic inflation and to the currency's loss
of value in international markets.[41]
However, in conditions of economic crisis agents within the economy do
not automatically increase spending and lending of additional available
funds. Rather, the additional funds may sit idle in banks in a condition
known as the liquidity trap.[42]
However, banks with large idle funds are usually preferred to
widespread defaults. In the case of Greece, some observers believe that
if the ECB and European Union do not stabilize Greek debt and instead
encourage the country to abandon the Euro, the result will be the
collapse of the Greek banking system.[35] Such an outcome would potentially have major consequences for the future of the European Union.

The crisis of 2011 in the European currency and central banking
system exposed the weaknesses inherent in a banking operation where the
primary assets were issued by state entities that did not all have the
will or the resources to make payments on what they had borrowed.
Without a unified continental system of taxation, the credit-worthiness
of the European Central Bank's balance sheet depends on a collection of
member states with widely varying taxation systems and national economic
characteristics.

By mid-August 2011 the flaws in the ECB and Euro design were becoming
increasingly apparent. As bonds issued by the weaker members of the
European Union collapsed in value, they dragged down the portfolios of
bonds held by banks in the "strong" countries, especially France. Talks
of strengthening the Euro included a plan whereby member governments
would borrow from a central bond facility which all members would
guarantee, but it was unclear how the tendency of weaker economies to
borrow beyond their means could be controlled and still retain
sovereignty, as reported in the Wall Street Journal:

Among potential steps debated in Europe is a system of centralized
borrowings by all 17 members of the euro zone, with debt issued by an EU
agency and every member vouching to stand behind the bonds used by its
peers. Such euro bonds would dispel concerns Italy or Spain might not be
able to get the financing they need, as it would be provided centrally.
As a unit, the euro zone has relatively attractive fiscal prospects:
Government deficit of 4.3% of gross domestic product is expected this
year and debt of 88% of GDP. But euro bonds would come with a huge
political cost. French President Nicolas Sarkozy on Tuesday rejected
them, saying they would lead to strong countries being "in the position
of guaranteeing debt they do not control.[43]

Although this crisis might seem to expose fundamental flaws in the
design of the European currency and central banking system, the
simultaneous political controversy over the debt ceiling
in the United States showed that even a large nation with a unified
economy and a unified system of taxation might not be able to honor its
contractual debts because of political deadlock. In each case, what was
(and remains) at stake was the value of the assets held in the central
banking system that provides, as its chief liability and principal
service to the economy, the circulating currency.

The European sovereign debt crisis
has placed the ECB squarely in the center of major economic, financial,
and social policy issues for the entirety of the European Union.
Traditionally central banks prefer a low key public posture that is
limited to occasional, and usually gradual, changes in the interest rate.
Multiple international economic crises in the 2008-2011 period have
pushed the ECB into the forefront as a core institution whose decisions
will profoundly impact the economic, social, and political development
of the European Union.

Furthermore, not only must the bank not seek influence, but EU
institutions and national governments are bound by the treaties to
respect the ECB's independence. For example, the minimum term of office
for an national central bank governor is five years and members of the
executive board have a non-renewable eight-year term.[44]
To offer some accountability, the ECB is bound to publish reports on
its activities and has to address its annual report to the European Parliament, the European Commission, the Council of the European Union and the European Council.[45] The European Parliament also gets to question and then issue its opinion on candidates to the executive board.[46]

The bank's independence has notably come under intense criticism since the election of Nicolas Sarkozy as French President.
Sarkozy has sought to make the ECB more susceptible to political
influence, to extend its mandate to focus on growth and job creation,
and has frequently criticized the bank's policies on interest rates.[citation needed]

The bank is based in Frankfurt, the largest financial centre in the Eurozone. Its location in the city is fixed by the Amsterdam Treaty along with other major institutions.[47] In the city, the bank currently occupies Frankfurt's Eurotower until its purpose-built headquarters are built.[48]

In 1999 an international architectural competition was launched by the bank to design a new building. It was won by a Vienna-based architectural office named Coop Himmelbau.
The building will be approximately 180 metres (591 ft) tall (the
present building is 148 m/486 ft) and will be accompanied with other
secondary buildings on a landscaped site on the site of the former
wholesale market (Großmarkthalle) in the eastern part of Frankfurt am Main. The main construction began in October 2008, with completion scheduled during 2014.[49][50]
It is expected that the building will become an architectural symbol
for Europe and is designed to cope with double the number of staff who
operate in the Eurotower.[48]